MPSC Case No. U-13746
FRANCE TELECOM CORPORATE SOLUTIONS L.L.C.
DIRECT TESTIMONY OF JEAN-SEBASTIEN FALISSE
EXHIBIT 3 (A-)
FINANCIAL STATEMENTS OF FRANCE ThLlkOM S.A. AND BANK STATEMENT OF FRANCE TELECOM CORPORATE SOLUTIONS L.L.C. France Telecom Corporate Solutions L.L.C. Demonstration of Financial Capability
As a newly-formed company, Applicant does not have any audited financial statements. Applicant is majority owned and controlled by France T&corn S.A. (“France Telecom”), one of the largest communications companies in the world. Applicant’s financial information will be fully consolidated in the financial statements of its parent company.’ A copy of France Telecom’s consolidated audited financial statements for the last three years is attached.
France Telecom is a leading integrated communications company which is publicly- traded on both the Paris Stock Exchange and the New York Stock Exchange. As indicated in its audited 2001 financial statements, France Telecom’s consolidated revenue for the year was S43.026 billon, EBITDA was E12.32 billion, and operating income was S5.2 billion.2 The attached financial documents demonstrate that France Telecom Corporate Solutions L.L.C. clearly possesses the requisite tinancial capability to provide intrastate telecommunications services in this State.
’ See Consolidated Financial Statements - France Telecom, 2001, 2000 and 1999 at p. 7 (“companies which are wholly owned or which France Telecom controls, either directly or indirectly, are fully consolidated”).
2 Id. at p. 3. As of September 12, 2002, the exchange rate between the euro and the U.S. dollar was approximately cl to US$O.98.
WASHlNGTON25714lvl FRANCE TELECOM CONSOLIDATED STATEMENTS OF INCOME (in milllonr Of fANo*. BXcBPl p*r mare data) FRANCE TELECOM CONSOLlDATED BALANCE SHEETS (i” rnilliO”S Of euras,
Note June JO. Dsc*mberJf, 2002 2001 FRANCE TELECOM CONSOLIDATED OF CASH FLOW ,i” millionr OfWro6) FRANCE TELECOM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS,EQLllTk’ (3” milliona 0, e”rol ercwt per share data) FRANCE TELECOM
CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31,2001,2000 and 1999
Avertissement Cette traduction anglaise des comptes consolid& rt+digPs en langue fraqaise a Jt& pr~parPe pour le confort des lecteurs anglophones. Malgr& tout le soin apportb ci cette waduction, certaines erreurs, omissions ou approximations peuvent y subsister. France T&Gcom. ses rep&entants et ses salari& n ‘en assumeront oucune responsabilit6.
Disclaimer This English language translation of the consolidated financial statements prepared in French has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain errors, omissions or approximations may subsist. France T&corn, its representatives and employees decline all responsability in this regard. Consolidated statements of income for the years ended December 3 1.2001.2000 and 1999 3
Consolidated balance sheets at December 3 I ZOOl,2000 and 1999 4
Consolidated statements of changes in shareholders’ equity for the years ended December 31. 5 2001,200O and 1999
Consolidated statements ofcash flows for the years ended December 31,2001,2000 and 1999 6
Notes to the consolidated financial statements note 1 _ Description ofbusiness 7 note 2 - Summary of significant accounting policies 7 note 3 _ Main acquisitions and divestitures of companies 14 note 4 - Goodwill in consolidated investments 19 note 5 - Other intangible assets 20 note 6 - Plant, property and equipment 21 note 7 - Investments accounted for using the equity method 22 note S Other investment securities and related receivables 25 note 9 - Trade accounts receivable, less allowances 28 note IO - Prepaid expenses and other current assets 28 note I I _ Deferred income 29 “OIC 12 - Net borrowings 29 note 13 - Convertible and exchangeable notes 30 note I4 - Other long-term borrowings 31 note IS - Other short-term borrowings 33 note 16 - Exposure to market risks 34 note 17 - Fair value of financial instruments 37 note I8 - Pension plans and other long-term liabilities 38 note 19 - Other current liabilities 40 note 20 - Minority interests 40 note 2 I - Shareholders’ equity 40 note 22 - Segment information 42 note 23 - Personnel costs 43 note 24 - Special items, net 44 note 25 _ Other non-operating income (expense), net 44 note 26 - Income taxes 45 note 21- Related party transactions 47 note 28 - Commitments and contingencies A8 note 29 - Litigation and claims 52 note 30 - Subsequent events 53 note 31 - Compensation of the Board of directors and the Executive Management Committee 53 note 32 . List of consolidated companies and affiliates at December 3 I, 2001 54 FRANCE TELECOM CONSOLIDATED STATEMENTS OF INCOME (in millionS Of cum*. exc8pt per Share era, FRANCE TELECOM CONSOLIDATED BALANCE SHEETS (in millions ofeums) FRANCE TELECOM CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY (in miuonr Of ewm except pershare ma, FRANCE TELECOM CONSOLIDATED STATEMENTS OF CASH FLOW (in rnilliO”B Of ems,
Year ended December 31 2001 2000 1999 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 3L.2001
1. DESCRIPTION OF BUSINESS subsidiaries and investment securities including dilurion results and the change in provisions against investmem France T&corn group (aFrance Telecomn) with notably its securities and marketable securities. dividends received. and publicly listed subsidiaries Orange, Wanadoo and Equant, is one movemems in restructuring provisions. This heading also’ of the leading telecommunicadons operators in the world and is includes results cm disposals where their relative size the principal tele~~mmunicadons operator in France. France exceeds ordinary activity (real estate, commercial T&CO” pravides consumers, businesses and other receivables...). telecommunication carrim with a wide range of services . including fixed line and mobile telecommunications, data The goodwill amortization charge relates to the goodwill of transmission. Internet and multimedia, broadcasting and ather fully and proponionally consolidated companies as well as value added services. investments accounted for under the equity method. . The balance sheet classifies assets and liabilities based on 2. SUMMARY OF SIGNIFICANT ACCOUNTING liquidity or maturity dates, and presents shoeterm balances POLICIES (due within one year) separately from long-term balances.
The consolidated fmancial slalements of France Telecom are . The statement of cash flows excludes from changes in cash prepared in accordance with French generally accepted those changes in hank overdrafts and marketable securities accountmy principles under rule 99-02 of the Conlit@ de IO having maturities in excess of three months at the time of ,Q~~ln,,,,e,,,~,~on Com,mblc (CRC). purchase, which are presented as financing and investing activmcs. France T&corn has reviewed provisions recorded at December 31. 2001 and does nat anticipate any significant impact with Moteover, in order to ensure comparability of the 2001 financial respect 10 the first application on January I, 2002 of rule CRC statements with those of prior years, specific headings have been 00.06 on liabilities. introduced on the face of the balance sheet and s~atemeni of income at December 31, 2001 in order 10 reflect directly (i) the receivable from the sale of real estate (Note 6) and (ii) the exceptional goodwill amortization. The consolidated balance sheet. statement of income and statement ofcash Paws are prepared in Euros.
. EBITDA represents operating income before special items, net and before depreciation and amortizxion. The main consolidation principles are as follows: . . Operaring income before special items, net is presented Companies which are wholly owned or which Francs separately. T&cam controls, either directly or indirectly, are fully consolidated; l Operating income represents the difference between . operating revenues and charges. It includes specific non- Companies in which France T&corn and a limited number recurring items. recorded under the heading eSpecial items, of other shareholders exercise joint commI are accounted nctn within Operadng Income. for using the proponionare consolidation method; . . The costs resulting both from the discounring of the French Companies over which France T&corn exercises early re!irement plan and from tbq French legal regime of significant influence hut does not control (generally a 20% employee profit &a& a& &semed BS a separate line item to 50% controlling interest), are accounred for under the in the consolidated statement of income after Operating equity method; Income. . Material inter-company balances and tmnsacdons are . The <
7 FRANCE TELECOM
NOTES TO THE COh‘SOLIDATED FINANCIAL STATEMEKTS
December 3LZOOl
Tronslorion ofjiinonciul skzmm~s offoreign subsidiaries At yearrend, foreign currency denominated monetary balances. except far those hedged by currency swap contracts, are The financial statements of foreign subsidiaries in a “on Euro translated at closing exchange rates. functional currency, except for those in countries with hyper- inbtianary economies, are translated int” Euros as follows: Unrealized gains and losses on foreign currency denominated . assets and liabililies are translated at the year-end rate; balances, except for those hedged by currency swap aSreem.?nts and for those arising on liabilities effectively hedged by asset-s in . items in the statement of income are translated at the the same currency, are recognized in the statement of income for average rate for the year: thcperiod. . the translation adjustment resulting from the “se af these different rates is included as a separate component of shareholders’ equity.
The financial s~atemcnts of the Argendnea” subsidiaries have been convened under the terms of the CNC (Conreil Norionol de Revenues from telephone subscriptions or Internet access lo Co,,qxobili,~, annO”“Cement of January 18, 2002 relating to arc recognized on a straight-line basis wer the invoicing the accounting consequences of the devaluation of the period, Argentinean peso. Balance sheet items, reven”es and expenses from significant operations from December 21, the date on which Revenuer from incoming and outgoing traffic are the Argentinean peso ceased to be quoted, to December 31,2001 recognized when rhe service is rendered, have been convened “sing a rate of I .65 pesos for I Euro. Revenues from sales of telecommunicatians equipment. net of point of sales discounts, and connection charges are The loal currency financial statements of foreign subsidiaries recagnized “p”n delivery 1” the c”st”mer or aclivation of operxing in countries with hyper-inflatianary economies me the line, as appropriate, remeasured into their functional currency, prior to convening to Euro, using the following method: Revenues from Internet advertising are recognized “ver the period that services are provided. Baner fransacLi”ns are recorded, only when their val”e can be determined, and in this case are recorded at the fair value of the goods or servicer provided or received, whichever is m”re readily determinable in the circumsunces,
Revenues from advcnisemenls in printed and eleckmic directories are recognized when directories are published.
. the transladan adjustment resulting from the “se of these different rates is warded in the inane statement as an exchange gain or loss.
The financial statements of subsidiaries remeasured as described above are then translated int” Euro using the method applied to all foreign subsidiaries ofFrance Telecom. FRANCE TELECOM
YiOTES TO THE CONSOLlDATED FINANCIAL STATEMENTS
December 31,2001
Customer acquisition costs and loyalty costs relating to mobile France Telecom does not consider itself exposed to a and lnteme~ cusmmers are expensed as incurred. These costs concentration of credit risk with respect to trade accounts consist principally of commissions and rebates paid LO receivable due to its larfe and dixne cuslomer base (residential. diwibumrs. professional and large business cusmmen). Allowances are recorded on the basis of an evaluation of the risk of non-recovery of receivables. The allowances are based on an individual or statistical assessment of this risk.
Advertising costs are expensed as incurred. Advertising costs Customer receivables which are secunized are removed from the amounted to f 1.063 million in the year ended December 31, heading “Trade accounts receivables, less allowances” when the 2001. f 939 million in the year ended December 3I.2000, and rights and obligations attached to such receivables are f 664 million in 1999. definitively transferred to third parties. Subordinated shares held in fends eonmun de erkmces as pan of these transactions are recorded as “Other long-term assets, net”. Depreciation of such shares, determined based on the risk of non-recovery of the receivables divested, is presented as a reduction in “Other long- term assets. net”.
Costs reladng 10 the development of web sites are capitalized or Cash and cash equivalents consist of cash and highly liquid expensed depending o? the phase of development of sites: costs investments wirh maturities generally of three months or less at rehing 10 the planning and operating stages are expensed, costs the time of purchase and are stated at cost, which approximates related to development and creadon of [he design are capitalized. fair value.
Two types of earnings per share are shown: basic earnings per Marketable securities are valued at acquisitio? cost. When share and diluted eaminSs per share. The number of shares used necessary, a provision is recorded on an investment-by- for the caIculadon of diluted earnings per share lakes into investment basis 10 adjust this value to the average market value account the conversion into ordinay shares of existing over the month prior to year-end or their estimated trading value potentially dilutive instruments. Diluted earnings are calculared for securities not publicly traded. 8s net result adjusted for the financial charges of dilutive iwruments, net of their effect on tax and employee profit sharing.
Own shares held, when recorded as a reducdan in consolidated shareholders’ equity, are not included in rhe calculation of earnings per share.
9 FRANCE TELECOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31,.?001
sales. Cost relates to acquisition or production costs and is lmpaiment charges are recorded, where necessary. as .the generally determined using the weighted average method. difference between net book value and fair value. The recoverable value of the goodwill is assessed with reference to cash flow projections discounted using appropriate rates and considering other advantages expected at the acquisition date such as synergies resulling from the integralion of the business Upon acquisition of a business. the purchase price is allocated on with France T&corn’s operations and its stralegic position for a fair wlue basis to the identifiable assets and liabilities of the the group. business acquired. The fair value of identifiable intangible assets such as trademarks, licenses and customer relationship is determined using generally accepted methods such as the income approach. the cost approach, or the market value approach. Other intangible assets include trademarks, customer The excess of the purchase price over the fair value of the share relationship, licenses, patents and submarine cable link access of identifiable awfs and liabilities of the business acquired is rights. recorded in the consolidated balance sheet under the heading G Goodwill I> for fully and proponianally consolidated entides Licenses to operate mobile networks are recorded at historical and is included in the heading < NOTES TO THE CONSOLlDATED FINANCIAL STATEMENTS Deeember 31,200l consequently, are recognized in income over the estimated useful lives ofthe corresponding .weL. Asre,~ transferred from the French State on January I, 1991, upon the creation of France Telecom as a public sector operator, were recorded in the opening balance sheet at values jointly approved by the Telecammunicarions Ministry and the Ministry ofEconomy and Finance. Since that date. property, plant and equipment are recorded at Plant. property and equipment and intangible assets are written historical cost of acquisbian or at conslruction cost. Cost of down when, as a result of events or changes in circumstances, neworks includes planning and construction costs, as well as site their recoverable value appears to be permanently less than their installation and equipment upgrade costs. carrying value. lnteresr arising from debt incurred to finance construction and . For assets to be held and used, impairment is principally development of assets is. from January I, 2000, capitalized as determined for each group of assets by comparing their pan of the cost of such assets during the construcdon period. carrying value with the undiscounted cash flaws they are expected to generate based upon management’s expectations Repairs and maintenance costs. except to the extent that they of future economic and operating conditions. increase productivity or extend the useful life of an asset, are Where necessary, impairment of these assets is recorded as expensed as incurred. the difference between carrying value and fair value. Fair Leased assets arc recorded as an acquisition of an asset and the value is dewmined on the basis of discounled cash flows or incurrence of a financial debt when the lease terms effectively by reference to replacement cost for used equipment. cost of transfer the risks and rewards of ownership of the asset to France ahnative technologies or recent transactions for similar Te,ecom. Equally, where France Telecom transfers ,he risks and businesses, or market prices. rewards of ownership to a third pany through a lease contract, . Assets to be disposed of are written down to their fair value. dds is accounted for as a disposal. less costs of disposal, when such value is lower than their Deprcciatian of propeny, plant and equipment is measured an a carrying value. srmight-line basis over the following estimated useful lives : Buildings and leasehold improvements ,nvesrn,enr securities Swivhing. transmission equipment and other investment securities are stated at cost, including any associated network equipment direct costs. An allowance is recorded when the value in use, Cables and public infrastructure based upon management’s analysis. appears lo be permanently Computers and sofrwarc (excluding network) less than carrying value, on the basis of different criteria such as Other market value, the outlook for development and profitability, and the level af shareholders’ equity, and taking into account the specific nature ofeach investment. France T&corn may receive non-repayable investment subsidies in the form of capital projects funded directly or indirecdy by third panics. primarily local and regional governments. Subsidies are recorded as a reduction of the cost of the awets financed and, FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 Deferred income taxes are recorded on all temporary differences France T&corn manages interest rate and foreign currency risks between the carrying amounts of assets and liabilities for using derivative financial instruments including interest rate financial reporting purposes and the amounts used for rax swaps, interest rate cap and floor contracts, foreign exchange purposes, as well as those arising from loss carry forwards. futures contracts on organized forward markets, currency swaps Deferred tax assets are provided for to the extent that the and currency options. All such instruments are entered into for recovery of these taxes is not considered probable. hedging purposes. France Telecom uses the liability method under which deferred Income and costs resuking from the use of these instruments are taxes arc measured applying the tax rates enacted at the end of recorded in the consolidated statement of income on a the accounting period. as applicable at the time the temporary symmetrical basis with the underlying transaction being hedged: difference is expected to reverse. Where significant, deferred tax . Differences between interest receivable and interest payable assee and liabilities are discounted when reversals can be on swaps, caps and floor contracts designated as hedges, as reliably scheduled. well as premiums paid for these operations or discounts, arc recorded in the consolidated statement of income over the life of the contract as an adjustment to interest expense; Deb, i.w,ance C”P,S . Initial differences between the negotiated term rate and the fixing me for the day on forward exchange contracts and Debt issuance costs are amortized over the term of the related currency swaps designated as hedging operations are debt instrument since January I. 2000. recorded in income over the life of the contract BS an adjustment to interest expense. Subsequent gains and losses generated on these contracts due to fluctuations in exchange rates are recorded as exchange rate corrections resulting Own shares held by France T&cam are reflected in the from the item hedged; consolidated balance sheet at their acquisition cost as a reduction . Gains and losses arising on contracts designated as hedges in shareholders’ equity except for those held in share price of identifiable firm commitments or identifiable future stabilization transactions. which are recorded as marketable transactions are deferred and taken into account in the sceurities. Gains and losses on disposals of such shares, including valuation of the transaction at maturity. related taxes are recorded within shareholders’ equity, net of tax. Allowances recorded against own shares held within investment securities in the single company financial statements of France Cenain operations do not qualify for accounting purposes as Telecom. as well as provisions for risk relating to commitments hedging operations under France Telecom’s policy. Derivative to repurchase own shares, are eliminated on consolidation. financial instruments which do not qualify for accounting purposes as hedging operations relate mainly to opcmtions Commhmenrs to repurchase own shares, set out in Note 28, are related to management of short-term debt (the Euribor 3 month recorded as an off balance sheet commitment until the future contract and rate collars). Such operations are evaluated as rep”Kh*Se. follows: . For operations on organized markets, margin calls are recorded direedy in the statement ofincome. 12 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,200, . Net unrealized losses, calculated on instruments periods until the end of the plan as personnel opt. for early negotiated over the counter, are fully provided for. retirement. . Unrealized gains on instruments negotiated over the counter are recorded upon unwinding of the posirion. In France, legislation requires that lump sum re,iremen, indemnities be paid 10 non-civil servant employees based upon their years of service and compensation at retirement. The Civil servams employed by France Telecom are eligible 10 actuarial cost of this unfunded obligation is charged annually 10 recehe retirement benefits from the civil servant and military income over the employees’ service lives. The effect of changes personnel defined benefit pension plan, which is administered by in assumptions is accounted for in the consolidated statemen, of the French S,ate. income over the average remaining service life of employees. The < France Telecom has commitments to provide cenain additional post-retirement benefits such as telephone equipment, credit card In accordance with the < A provision corresponding ,o an actuarial measuremen, of the Shares of subsidiaries issued upon exercise of subscription liability under ,hia plan has been recorded (Note 18). Actuarial options granted to employees are reflected as B share capital assumpdons are monitored and modified based upon experience. increase, based on the exercise price of the options. creating a dilution result for France Telecom. Changes in ac,uarial assumptions are accounted for from the anniversary of the plan. in the consolidated statement of income Witb regard 10 purchase options, a provision is recorded in the in the year of change. and on a prorate basis over future service books of the subsidiary to the extent that the acquisition cost of I3 FRANCE TELECGM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 the shares purchased to service the exercised options is higher .Equant ccmnmn share five years after the date of than the exercise price of the options. subscription, and Social charges assumed in came&m with the share option plan . Contribution lo Equaa in exchange for 80,617.348 arc provided for when it is probable that the options will be newly issued Equant common shares. of 100% of the exercised. share capital of Global One Communications World Holding B.V. and Global One Communications Holding B.V, with France T&corn retaining ce~in &tivities previously performed by Global One. This contribution was valued on the basis of discounted The preparation of financial statements in conformity with future cash flows at USS 5,168 million (f 6,094 generally accepted accounting principles requires management to million), including contributed cash amounting to USS make estimates and assumptions which affect the amounm 300 million. reported in the financial statements and accompanying notes, notably with regard 80 provision for risks, deferred tax assets, As a result of these transactions, France T&corn owned, at June goodwill and investment securities. Actual results could differ 29,2001,54.27% of the combined company Equant. from those estimates. Under the terms of the agreement, within a two-year period. France T&corn is to pay back to Equant: . 50% of costs related to the preservation of employment 3. MAIN ACQUISIT’IONS AND DIVESTITURES OF or the cancellation of employment contracts for certain CO.\IPANIES employees of the newly combined company Equant - Global One. Main acquisitions . Restructuring and integration costs other than those relating to employees, up to a maximum of US6 210 El/,,““, million. Following the Exuaordinary General Meeting of Equam on June On the basis of these elements, the preliminary purchase 27. 2001, and in accordance with the agreement concluded in accau&g for Equant at December 31.2001 is as follows: November 2000, France T&cam performed the following lransactions On June 29.2001: . Acquisition of67,950,000 Equant cwnmon shares from the SITA Foundation in exchange for France T&corn shares at B ratio of 2.2 E,quant shares per France 6,094 T&corn share, resulting in consideration of e 1,739 million based on the share price at June 29, 2001 of 1.179 f 56.3 per share. . lnveslment of US6 I billion (E 1,179 million) through 7,273 subscription far 10 million newly issued Equant x 45.73% 3,326 convertible preference shares; each preference share has the same voting righ,s as one Equant CO,,,,,,O~ share and will automatically cowen into one new Acquisition of Equant sommon shares from 1,739 the SITA Faundadan 14 FKANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,2001 consortium, increased their share in TP SA by 8.93% and 3.57% respectively for a total of PLN 3,656 million (e 950 million) of. which PLN 2,612 million (f 679 million) were paid by France Telecom. Following this operation, the consortium holds 47.5% of TP SA. of which 33.93% is held by France Telecom. The consonium holds a call option for a supplementary investment of 2.5% plus one share. Moreover. put and call options have been concluded between Kulczyk Holding and France Telecom relating to the participation of Kulczyk Holding in TP SA (Nate Preliminary goodwill in Euros is amortized from July 1, 2001, 28). over periods of up to 20 years, and amounts IO f 4,800 million The preliminary goodwill relating to this complementary (US 4.071 million). The acquisition and restructuring costs investment anmums to e 213 million and is amortized over 20 associated with the acquisition were depreciated in the second years from October I, 2001. The investment in TP SA is half of 2001 (Note 4). accounted for under the equity method (Nate 7). On July 2. 2001, France Telecom issued to all Equanl In December 2000, Wanadoo SA made en offer for the entire shareholders o,ber than the SlTA Foundation and 10 cenain share capital of Freeserve. the main Internet services provider in owners of share options and reswiclcd share awwds granted by the United Kingdom. The offer was carried out in March 2001 on Equant before November 19.2000, 138,446,013 contingent value the basis of a parity of 0.225 new Wanadoo shares for each rights (“CVR”). Each CVR gives the holder the right to receive a Freeserve share. The number of shares issued 81 mnounts to cash payment, an the third anniversary of the completion of the 230,069,681, resulting in a purchase price of& 2,078 million. Equant wvwxtion (June 2004). representing the difference if negative between the average Equant share price for a defined The resultant goodwill for this operation amounts to e 1,886 period and f 60, limited to a maximum of f 15 per share. million and is amortized over a 20.year period from March I. Movement in market price in 2001 and in the beSinning of 2002 2001 (Note 4). (tmably in terms of EBITDA multiples) has resulted in a CVR market value since issue corresponding to B payment of the CVR at maturity. Whilst considering that the Equant business plan assumptions remain valid, France Telecom management On December 18. 2000, Wanadoo agreed to acquire the entire considers that such a payment would not be recovered from the vale in use of the Equant investment as derived from the share capital of lndice Multimedia, the second largest directory operator in Spain. At the general meeting on March 22,200l and business plan. As a results of this, France Telecom has recorded a in accordance with the agreement, Wanadoo acquired 86.71% of provision for the maximum risk, amounting to E 2,077 million (Note 181. the capital of lndice Multimedia by issue of 20.325.444 shares and a cash payment off SO.5 million, representing an acquisition cost of e 190 million. The remainder of the capital will be acquired through options granted both to shareholders, in cash TP SA. when the option is exercised, and also to certain shareholders, in Under an agreement signed on September 5, 2001 between the cash and in Wanadoo shares at exercise. Polish government and the consortium lead by France Tslecom. France Telecom and Kulczyk Holding, its partner in the 15 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,2001 The acquisition of lndice Multimedia gave rise to goodwill of E 318 million being amortized wcr a 20.year period from April Main acquisitions and divestments 01 non consolidated 1,200l (Note 5). investments (Note 8) Wi,id For the year ended December 31.2000 On October II. 2000, France Telecom and ENEL reached an Main acquisitions agreement relating to the acquisition of lnfostrada by ENEL and its cmmitment to merge Wind and Infostrada. Under this agreement, and following an extraordinary general meeting on July 30. 2001 which approved a capital increase In May 2000, France Telecom, and the Vodafone group signed reserved for Enel as a consideration far the contribution of an agreement with effect August 22, 2000, resulting in (i) the Infoswada. France Telecom’s interest was reduced from 43.4% to cash purchase by France T&corn of 664.74 million Orange less than 27% in the new entity. The effect of this operation is a shares for f 21.5 billion (ii) the contribution by the Vodafone dilution gain of E 934 million. The merger of Wind and group to France Telecam of 544.56 million Orange plc shares in lnfostrada had legal effect at January I, 2002. exchange for 129.20 million new France Telecom shares, issued Moreover. under this agreement, France T&corn and ENEL ate 140.2 per share, with Vodafone renouncing the voting rights agreed to make a public oNering of 25% of Wind, subject to attached to the shares. As a result of this operation. France market conditions. The agreement includes put and call options Telecom held 100% of the share capital of Orange plc. France over Wind shares with ENEL, in favor of France Telecam (Note T&corn immediately repurchased 15.36 million France Telecom 28,. shares from Vodafane at issue price, such that the Vodafone group would not hold more than 9.9% of the share capital of France T&corn. This share purchase was financed by France T&corn’s issue of a security off 2.15 billion with maturity March 2001. In February 2001, France T&corn sold 636 million existing shares of Orange SA representinS 13.24% of the total number of existing shares and voting rights in Orange SA, through a public Following the Inilial Public Offering (JPO) of Orange SA on offer 10 private and institutional invesmrs as well as employees. February 13, 2001. Vadafone and France Telecom reached an The net proceeds from these offers amounted toe 6.1 billion. agreement on February 28,2001, with respect to the terms of the Since February 13. 2001, Orange SA shares have been listed on buy-back of the outstanding 113.85 million France Telecom the Premier March6 of Euronext Paris SA and on the London shares held by Vcdafane. This transaction represents a Stack Exchange. This operation has no material impact on comprehensive settlement of the put and call arrangements set up consolidated income before tax at December 31, 2001, BS a in August 2001 and fixes the total price of these shares 81 provision of E 1,773 million to cover the expeced loss was approximately e I I .63 billion. Cash Payments of E 6.65 billion recorded in the financial statements at December 31.2000. were made in March 2001 against delivery by Vodafone of 64.1 million France T&cam shares. A final cash payment of a 4.97 Following this offering and the transfer to E.On of 102.7 million billion is due on March 25, 2002 against 49.8 million France shares of Orange SA as a consideration for 42.5% of Orange Telecom shares (?4ote 21 and 28). Communications SA, acquired in November 2000, France T&corn owns 84.4% of Orange SA (Note 28 - commirmems linked to the acquisition of Orange Communications SA). 16 FRANCE TELECOM KOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 On the basis of this agreement. the tat.4 acquisition cost of Omnge,plc amaums on a historic cost basis to e 35,472 million *s summarired below: (in rnillims ofeums) Goodwill arising at acquisition amounting to ‘Z 28,924 million is Cash consideration 21,519 amanized over a 20 year period. Following the IPO ofOrange in Transaaion costs, net of related tax JJj February 2001, goodwill has been reduced to C 24,345 million. 21,693 Sub-total On November IO, 2000 France Telecom acquired E.On’s 42.5% Share consideration through issuance of shareholding in Orange Communications SA (Switzerland) for 129 201 142 France Telecom shares 18,114 f 1,299 million of which 75% was sealed thmugh shares of Price adjustmem resulting from February 28.2001 Orange SA, with put and call arrangements (Note 26). This agreement u investment was transferred 10 Orange. This acquisition increased 35,472 Total purchase price the ownership of Orange in Orange Communications SA from 42.5% to 85%. The purchase price has been allocated to the following This investment, accounted for using the equity method since identifiable assels and liabilities: September I, 2000, has been fully consolidated from November I, 2000. Goodwill arising from the acquisition of the 42.5% interest amounting to f 1,466 million is amortized over 20 years. Following the PO of Orange, goodwill has been reduced 10 f 1,234 million. 4 600 Global One I 950 In March 2000, France T&cam acquired Sprint and Deutsche 875 Telekom’s interests in Global One for a total of USS 3,898 544 million (E 4,080 million) genemdng goodwill of e 3,966 million amonized over a 20 year period. Following these acquisitions. (I 421, Fence T&corn owned 100% of Global One. This investment, 6 548 previously accounted for UsinS the proportionate consolidation 28 924 Gwdwill method, has been fully consolidated from April I, 2000. France OfWhiCh gacdwill alloC*Ied to Orange ,418 T&cam, holding the entire share capital of Global One Camm”“ieations SA. following these operations, contribured almosl all the acdvities of Global One in 2001 in relation to the Equant acquisition. Following this contribution, goodwill has been reduced to The purchase price allocation resulted in an increase to net assets f 2.346 million at December 31,200l. of e 7,621 million, and relates primarily m the Orange trademark, cutomer relationship and a GSM license not recorded in the orange p,c conrolidsd tm,anse Sheet before the acquishio” MobilCorn date. The trademark has been recognized based on the discounted value of cost savings equal to royalties which would have been On March 23, 2000, France T&corn entered into a cooperation payable to third panics for the use of the trademark, had Orange framework agreement wbh MobilCorn, a German fixed line not owned such trademark. The customer relationship has been operator. mobile and Internet service provider. and MobilCorn’s 17 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Derember 31.2001 founding shareholder, regarding the acquisition of a UMTS telecammunications operator. for total considenttion of E 4.5 license and the launch of UMTS mobile telecommunications billion, of which France T&corn contributed e 3.4 billion. services in Germany. Pursuant to the agreement, France Telecom Preliminary goodwill arising from the acquisition amounts to e extended a f 3,749 million loan to a company jointly owned by 2,701 million and is amortized over 20 years since October 1, France Telecom and MobilCorn to fund that company’s bid for a 2000. UMTS license. In October 2000, France T&corn contributed its This investment has been accounted for under the equity method share in this company to MobilCorn in exchange far a 28.5% since October I, 2000. equity interest in Mobil&m which was subsequently contributed LO orange SA. In connection with these transactions, France Telecom. JTC MobilCam and Mobil&n’s founding shareholder entered into a cooperation framework agreement, with notably put and call In January 2000, the consonium composed of France T&corn option agreements exercisable under certain conditions (Note and the Arab Bank of Jordan reached an agreement with the 28,. Jordanian government over the acquisition of 40% of the capital of the Jordanian telecommunications operator, Jordan Mobil&ml has been accounted for under the equity method since Telecommunications Company (JTC), for USS SO8 million November 1. 2000. Goodwill arising from the acquisition (E 5 10 million). This acquisition was made through a holding ~rnounls 10 f 2.700 million and was initially amonized over a 20 company, Jitco. held 88% by Francs T&corn and 12% by the year period. Arab Bank of Jordan. Goodwill amounts to E 342 million and is amortized over 15 years. This investment has been proponionately consolidated from January I, 2000. On July 2s. 2000. France T&corn reached an agreement with ENEL and Deutsche Telekom 10 purchase Deutsche Telekom’s entire 24.5% interest in Wind. France Telecam acquired a 18.9% On July 19, 2000, France T&cam carried out an IPO of its shareholding for f 2,082 million, bringing its ownership of Wind newly created wholly owned subsidiary Wanadoo with a listing to 43.4%. with ENEL owning the remaining 56.6%. on Euronext Paris. Approximately 10% of the outstanding shares of Wanadoo were listed through,the issuance by Wanadoo of Wind is accounted for under the equity method and the new shares and the sale by France T&corn of uisring shares. preliminary goodwill arising from the acquisition of the The proceeds from the offering amounted to approximately e 2 additional 18.9% amounts to e 1,994 million and is amonized billion. This IPO was followed in October 2000 by Wanadoo’s over 20 years. Following the finalization of the purchase price purchase of minority interests in France T&corn Internet allocstion exercise in 2001, goodwill amounts toe 1,523 million subsidiaries in Spain and in the Netherlands in exchange for before the lnfostrada contribution. newly issued Wsnadoo shares. Tix effect of these two transactions resulted in an after tax gain in 2000 of e 1,952 million. As a result of these transactions, France Telecom’s TP SA interest in Wanadoo has decreased 10 88.64%. 1” October 2000, mbving a” agreemsnt between Ihe Polish government and a conxx&n led by France Telecom, France T&corn acquired 25% and Kulczyk Holding, its partner in the consonium. acquired IO% of the share capital of Telekamunikacja Polska SA (TP SA), Poland’s state-owned 18 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,200, In August 1999, France T&corn and Telecom ltalia increased 4. GOODWILL IN CONSOLIDATED INVESTMENTS their investment in the cons&urn Nanel Inversora, which Main goodwill arising from fully or proponionately consolidated cmmk the Argentine operator T&corn Argentina, by jointly investments is as follows: acquiring an additional 35% of voting rights for USS 265 million (C 249 million) each. Following this transaction, France Telecom and Telecam llalia each control 50% of the voting rights of the cansonium. This inwstment has been accounted far using the proportional consolidation method from September I, 1999 to December 21, 2001. The goodwill arising from this acquisition amounted to f 190 million, and was initially amonired aver 15 23.435 (1.565) 27.047 2.554 (153) 2.848 567 (348) 496 4.619 (546) 2,347 (181) 3,833 85 (34) 16 (82) 323 (12) 311 328 I811 247 316 319 (56) 263 279 319 (130) 189 217 France Telecom assesses the value in use of Orange PCS and Orange Communications SA at the level of the segment resulting from the regrouping of Orange plc and the mobile activities formerly held by France T&corn. 19 FRANCE TELECOM h‘OTES TO THE CONSOLIDATED FINANCIAL STATEMEiiTS Deeember 31,2001 Due to the integration of Global One within Equant, France 5. OTHER INTANGIBLE ASSETS Telecom ~SS~SS.CS their value in use on a joint basis, taking into At Deeember,l. account their strategic value for the group. 2001 z The value in use of Freeserve and Wanadoo Espana as well BS COIf ACCYrn”l NC, book Net book ate4 value value Pages Jaunes and Indict Multimedia take into account their (in millions of eumr) depreeis straregic value within Wanadoo’s intemet and directories li0” businesses respectively. Te,eeammunicada”s .licenses 9,548 (244) 9,304 8.236 Movements in nel book valueof goodwill is a follows: PatcAr and IighLz Of “se 1.145 (363) 782 76, Trademarks 5.051 (86) 4.965 4.602 Market share 2.688 - 2.688 2,195 Other inmgible BSIC~S 819 (369) 450 495 Tots1 19.251 (Loa 18.189 ,a*9 Movements in the net book value of other intangible assets is as follows: Divestments relate to the decrease in goodwill generated by the IPO of Orange and Global One’s contribution 10 Equanl. In 2001. the goodwill amortization charge includes f 1.2 billion relating to Orange PCS and f 365 million relating 10 Equant and Global One and. in 2000, e 458 million relaring to Orange PCS for the period from September I to December 31 and fI2Sl million for Global One. Exceptional goodwill amortization in 2001 relates to Ananova and Wildfire (e 21 I million) and to the restructuring and other related costs for the new Equant entity (f 349 million) included ~~Telecammunications licenses* relates primarily to operating in the acquisition cost. licenses of mobile networks. in particular the payments paid for Transladon adjustmenu result mainly from the recording in the granring ofUMTS licenses: foreign currency of goodwill relating to non Euro zone (i) in 2001, in ~ranse forB 619 million (fixed payment excluding companies. associated costs). The duradon of this license is 20 years. (ii) in 2000, in the United Kingdom for f 6.6 billion and in the Netherlands fore 436 million. 20 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 Changes in the net book value of propsny, plant and equipment BE *s follows: aPatents and rights of usen relate mainly to patents and cable usage rights *001 2O”O ,999 (in nlilliO”6 ofewor, eTrademarksr and Kustomer relarianshipn relate mainly to the Openingbala”ce 34 623 28 964 26 577 Orange trademark and the Orange customer relationship in the . Aequiridonr ofplan,. United Kingdom resulting from the purchase price allocation of pmperty and equipment 7811 6 993 4 835 Orange pie (Note 3). The Global One trademark was depreciated . Effee,afaeq”isitiansand (I 605) 4 210 2 323 in 2001. divertitwes . Sale of real es!Atate (1963) - _ . Other retire*enLs snd sale. (286) (237) (151) . Depreciation expense (6 613, (5 509, (4 819) PROPERTY. PLANT AND EQUIPMENT 6. . Reelasrificatian (428) (701 (25) At December 31, m Translation sdjustment 189 272 224 *801 2(100 31 728 34 623 28 964 corr A~e”m”l Net book Set book *Ied Yll”C “*he In November 2001, France T&corn concluded a binding depreris reciprocal agreement with a consatium of real estate investmx to tion sell 431 office and mixed technical buildings, whereby the parties committed to sign notarial deeds by September 30, 2002. The notarial deeds were signed on March 12, 2002 for 242 buildings, representing 74.7% of the sales price of the trrasaction, and the remaining deeds are to be signed by June 30, 2002 as the administrative issues are settled. The result on disposal of the 431 buildings, recorded in “Other receivables” amounls fo f 2.7 billion, of which e 2 billion has been cashed at March 13, 2002. The gain on disposal, “et of costs, amounts to f 705 million, and has been recorded in non-operating result (Note 25). At the same time France Telecom is committed to re- lease through 6-9 year leases these buildings except for ceRain assets to be vacated in the shon-term (Note 28). In 2001, the effect of acqquisilions and divestitures relate mainly 10: (i) the first consolidation afEqua”r NV. for f 699 million, (ii) the equity aecaunting of Nortel~eelecom Argentina, for f 2.1 billion, (iii) the change in the percentage of pmponional consolidation Of ECMS. fore 156 million. FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 (iv) the first consolidation of Mauritius Telecom for f I20 million. In 2000, the effect of acquisilions and divestitures relate mainly to the consolidation of Orange plc for a total ofe 2,685 million and of Orange Communications SA (Switzerland) for a lotal of E 704 million. and to Global One (previously accounted for using the pmpanionnte consolidation method) for f 444 million. In 1999, the effect of acquisitions and divestitures related mainly to the propanional consolidation of Telecom Argentina for f 2.278 million. 7. INVESTMEKTS ACCOUNTED FOR USING THE EQUIT,’ METHOD The carrying ~~alues of France T&corn‘s investments in affiliates are as iollaws (in millions of euros): FRANCE TELECOM h‘OTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,ZOOl * Finally to depreciate, as a measure of prudence. se”eral asses totaling e 554 million (mainly the current account of MobilCorn with France T&cam). recorded in non-operating expenses. Telecam Argentina, pmponionally consolidated until December .?I, 2001, is equity accounted far from this date. Moreover, the Changes in investments in affiliates are as follows: conversion of the financial statements of T&corn Argentina as set out in Note 2, as wll as the amonization of the entire remaining goodwill have reduced the value under equity accoundng to zero. The Argentinean peso crisis of December 21, 10.506 1.066 956 2001 has lead Telecam Argentina to designate advisory banks in charge of setting up propositions for management of its debt. The 1.208 9.958 302 debt of T&corn Argentina is mainly denaminared in dollars, and the index&n of prices IO the dollar has been suppressed. France Telecom therefore considers that the Argentinean crisis has 348 reduced its capacity to conlrol. France Telecam neither intends 934 nor is obliged to increase its commitments in Argentina. The impact of the proponional consolidation of T&corn Argentina (786) (17) until December 21.2001 is as follows: (839) (in millions of euros) 200, 2000 1,326 (180) WO) 275 Sales al services and products 1,792 1,818 036) (16) Ebitda 641 685 Operaling income 178 235 Financial charges (128) (126) MobilCam Reexamining the perspectives for the mobile telephony market in Germany with the presence of two dominants operators and four entering operators has lead France T&cam: - To depreciate in full the goodwill, i.e. +? 2,509 million recorded in exceptional amonization, * To depreciate the balance of the equity accounting value, i.e. e 839 million recorded in non.operaling expenses, 23 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Deeember 31,2001 mainly (i) the difference arising on the revaluation of E 620 million in the equity accounted value prior to the complementary investment in Wind in July 2000 on the basis of fair value at that dare (Note 3). (ii) the entry of the Radian shares held by Equant, far E 342 million and (iii) the equity accounting of Nonel~elecam Argentina. In 2000. the investments made in affiliates relate mainly to inwstments in the mobile telephony operator MobilCam (Germany) and the operators TP SA (Poland) and Wind (Italy) as described in Note 3. In 1999. the main effect of acquisitions relates to the Nonel ,wersor* cansanl”m, proponionally consolidated from September I, 1999 (Note 3) Amonimtian of goodwill arising on equity accounted af,iliates amounts 10 f 336 million in 200, (E 126 million in 2000). Excepdonal amonimion has also been recorded for e2,509 million relating to MobilCorn and for e 185 million related to The equity in net income/(loss) of affiliates is presented as Nar,eL’Telecam Argentina. follows: Fallowing this, the net book value of the principal goodwill is as fallows at December 31,200,: 24 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 OTHER ,S”ESTMEi.‘T SECURITIES AND RELATED RECEIVABLES FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,200, At the date of preparation of the consolidated financial shares of NTL until March 2009 (unless NTL 81 lha, time mtements of France Telecom, 200, net income and opts for cash reimbursement or defers convertibility of the shareholders’ equity which major quoted and non-consolidaled preferred shares by one year. but in no event later than investees have made available are as follows: March 27, 2004). The number of NTL ordinary shares obtained through conversion of the convertible preferred shares would be equal to liquidation value per preferred share (USS 1.091). divided by the weighted average share price of the 25 days prior to the date the preferred shares be&e convertible preferred shares multiplied by I .25. arc repayable in cash on March 27,2009 for those preferred shares, which arc neither exchanged nor converted. ‘1’ Local GAAP da,*. mndakd at closing rate at December 31.2001 In order to reduce its debt, NTL began early in 2002 to seek a new strategic shareholder and commenced a process of financial restructuring. In this context, France Telecom has decided not to increase its financial commitments within NTL, and to reapprcciatc the value in use of iu investment on the following lnrertmenl in NTL basis: In ,999, France Tclccam acquired ordinary and preferred shares . The ordinary shares have been camp,ete,y depreciated. of NTL, telephone. inwmet ~cccss and cable television operator representing a complementaty provision of e 2.075 for f 2.97 billion and f 2.94 billion respectively. million in 2001. As part of an issue by NTL in March 2000 of 1.85millian . The convenible notes have been valued on the basis of preferred shares, for USS 1.85 billion, bearing interest 81 5% and their market price at December 31, 2001, resulting in a payable in preferred stock, France Telecom together with depreciation charge ofe 16, million, financial institutions subscribed preferred shares for USS 750 million (f 711 million at the historical rate) and USS I.1 billion . The preferred shares have been depreciated for 65% of respectively. As pan of this transxtion, France Telecam entered their nominal value, resulting in a charge of e 2,415 into put and ca,l option agreements with these four financial million. The depreciation of the preferred shares was institutions, amended in January 2002 (Nate 28). determined by reference to the market values of the NTL notes. On the assumption of a favorable outcome At December 3 I, 2001, France T&corn held 18.3% oithe voting from the process of financial restructuring committed rights (18.6% al December 3 I, 2000). and on the basis of the business plan presented by NTL On Sepwnber 12, 2001, France T&corn, the financial management, the management of France T&corn institutions and NTL agreed that these shares: considers that the net hook value of these preferred . may be exchangeable in whole or in part, ~1 the choice of shares corresponds 10 the best estimate aithe probable France Telccom, into shares of NTL Cahlecom Holding realizable value oiiu economic interest in NTL. GmbH, representing up to 50% of the share capital of the . A provision for risk of e 81, million has also been set company (this company holds the cable television activity up on the same basis for the preferred shares held by of NTL in Switzerland). the financial institutions and which are subject to put . may be convenible in whole or in pan, at the choice of and call options with France Telecom (Note 28). France Telccom at March 27, 2002, 2003 or 2004 into convertible preferred shares, convertible into common 26 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENlS December 31.2001 . Different costs linked 10 this opantion have also been fmm which date France Telaxm is entitled to dispose of it recorded 85 charges fore 448 million. within the limbs and conditions set out in the shareholder agreement. These items have been recorded in non-operating expenses for a total afe 5,910 million O‘lote 25). The management of France Telecom considers that it is not Sprint FON exposed to financial risk beyond the net book value of the As pan of a public offering France T&corn sold its share of in~esmmts and comminnents set out above i.e. f 1,806 million. 9.9% of Sprint FON, the American telecommunications operator. for USS 1.616 million (8 1,899 million) on June 4. 2001. The pm-tax gain on this transaction (net of exchange) anmums to f 181 million. Exit from STMicraelertronies Sema Group plc On February 12, 2001, in accordance with the agreement In December 2001. STMicroelectronics Holding II BV (STH II) reached with Schlumberger and Sema Group plc. France the holding company through which France T&cam, Areva, and Telecom contributed its investment in Sema group plc to the public offer for an amount off 931 million. The pre-tax gain on Finmeccanica held together an investment 0143.4% of the capital this transaction amounts toe 401 million. of STMicraelectronics NV (STM) made a private placement of 69 million STM shares, of which 39 million on behalf of France Telecom and 30 million for Finmeccanica. Fallowing this KPN Orange placement and as pan of the new agreement with Areva, France Telecom reduced from 49% to 36.2% its holding in FTICI, the In February 2001, France Telecom sold its 50% share in KPN company holding indi Under the shareholder agreement held with Areva and (e 2.9 billion).The net gain after tax amounts toe 2,173 million. Finmeccanica, France Telecom has committed to retaining the balance of its indirect share in STM until the end of June 2002, 27 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 crionces). France T&corn remains in charge of servicing the wansfened receivables on behalf of the Fmds eonmun de Crown C*stle International Carp Group (CCIC) Ckl”WS. In connection with the investments made in the Brkish France Telecom subscribed for benefical interests in the FCC, ,elecammunicadons operator NTL, the British campe,i,ian notably benefical interests subordinated far risk of non-recovery authorities (Office of Fair Trading) requested that France of the securitized receivables. Such benefical interests are T&corn withdraw from the companies forming the Crown recorded in “Other longterm assets, net”. Consequently. Castle lntemational Carp Group (CCIC) before October 31, depreciation of such benefical interests, is presented as a 2000. In June 2000. France Telecam sold a firs, tranche 0‘24.9 reduction in “Other long-term assea, net”. Losses on million ordinary CCIC shares in a public offering. The sales irrecoverable receivables and movemen,~ in the depreciation price amoumed to USS 693 million (c 730 million). The net gain provision for securitired receivables are presented within after tax amounrs to f 301 million. operating expenses. The positive effec, of lhis operation on operating cash flow In accordance with the commitments given in May 2000 by amounts in 2001 to E 914 million (excluding cosu of sale of France T&corn to the British competition authorities, those receivables - see Note 25). As a result of this transaction, “Trade sharer ofCC,C which were no, sold as pan ofthe public offerinS accounts receivable” have been reduced by e 1,765 million, in June 2000. were sold to a financial inslimtian. In July 2000, corresponding to the transferred receivables, and “Other lang- France Telecam sold 17.7 million shares. The sales price term aset~, net” have been increased by a net amoun, of E 851 amounted 10 USS 505 million. The recognirion of this sale in the million of beneficial interests in thcFonds con~nw de crAmces. statement of income has been deferred given ,he contmc,ual commitments of France T&cam (Na,e 28). Drutsche Telckom Pursuant to the framework agreement entered in,0 in May 2000 10. PREPAID EXPENSES AND OTHER CURRENT between France T&corn, Deutsche Telekom and Kredimnstak ASSETS fur Wiederaufbau (K(W) to unwind the cross shareholdings A, December 31, 2001, ,he variation of other receivables and bewecn France Telecam and Deutsche Telekom, France prepaid expenses is due primarily m the different categories of T&corn sold its 1.8% holding in Deutsche Telekom 10 KfW in preferred shares and sccwitics wi,h a May 2002 maturity on NTL December 2000. The sales price amounted 10 f 3.1 billion. The (,Z 553 million) and Morgan Stanley Dean Witter (e 510 million) net arrer tax gain *mO”ntS to f 1,445 million. received as payment from the sale ofNoon shares. 9 TRADE ACCOUNTS RECEIVABLE, LESS ALLOWANCES On May 18,2001, in accordance with the agreement reached in August 2000 wi,h Suez Lyonnaise des Eaux. Now’ majority shareholder. France Telecom (i) brought iu aggregate interest in Nom to 49.9% in exchange for the contribution of France In he 2001. France T&corn sold trade receivables for fixed Telecom’s cable network infrasvucture used by Noas and other line telephony ~antracts with consumers and certain businesses in minority shares in cable operators, subsequently (ii) sold its France. This sale was made without recount, as pan of a entire imeres, in Noes for an amount of f 1.187 million m securitization program with a Security Fund (fends commun de Morgan Stanley Dean Wi,mr Private Equity and NTL 28 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2OOL Incorporated (respectively 22.9% and 27%). The different 12. NET BORROWINGS categorjes of preferred shares and securities issued by the France T&corn‘s net borrowings are as follows: purchasers that represent the sale price have a maturity date of May 18. 2002. except for an amount off 138 million, which is due on May 18. 2007. As security, France T&corn maintains pledges an the Naos shares. In Ihe context of the NTL‘s financial restructuring (see note 8). no result was recorded from this sale of shares, and the gain recorded at June 30. 2001 (representing f 333 million) has been reclassified as deferred income at December 31,2001. 11. DEFERRED INCOME At December 31, 2001, apan from the operation set out in note 10 abaw. [his heading includes for f634 million the effect of spreading over 20 years the invoicing of civil works within the conwxt of the contribution of cable networks. (‘) After taking into account the receivable from sale of real estate for f2.689 million (hoots 6). the net borrowings of France T&corn amount fof 60,734. At December 31, 2001, the contribution of newly consolidated companies in 2001 amounts to e 38 million. Moreover. accounting for None1 / Telecom Argentina using the equity method since December 21, 2001 has the eNem of reducing net borrowings of France Telecom at December 31, 2001 by e 2 billion. The bond market is the main source of long-term financing for France T&corn. The annual weighted average interest rate of France T&corn’s net borrowings in 2001 represents 5.82% compared to 5.74% in 2000. Moreover, the weighted average spot rate of bank loans and notes amounts at the end of December 2001 to 5.29% compared to 5.98% at the end of 2000. FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 13. COSVERTIBLE AND EXCHANGEABLE NOTES The table below gives details of outstanding convertible or exchangeable notes issued by France T&corn SA a, December 31,ZOOl: The characteristics of the exchangeable notes issued by France T&corn in 2001 are as follows: Concurrent with the sale of shares of Orange SA i” February 2001, France Telecom issued exchangeable now for e 3.1 billion. The notes, of nominal value E 12.70. bear interest a, a rate of 2.5% per annum with the firs, payment due on February 16,2002 and the final payment due on February 16.2003. A, any lime, after their issue, these ““tes “re redeemable by way of exchange, a, the option of the holder. for existing shares of Orange SA a, a” initial m,io of one share far each note, subject ,o adjustment on the occurrence of cenain evems and subject 10 the right of France T&corn 10 elect fo pay cash in lieu of delivering shares of Orange SA. On November 29, 2001, France T&mm issued noes exchangeable for its own shares fore 3.5 billion. The ““,a, of nomiml value e 1,000, bear interest a, a raw of 4% per annum. A, any time after their issue, these notes are redeemable by way of exchange, a, the option of the holder, for exis,ing shares of France Telecom a, a ratio of 13.8889 per bond (represenling a” exchange price per share of e 72). this ratio being subject ,o possible adjustment. Starting December IS, 2003 under terrain conditions, lhe” ““conditionally smning December I3,2004. the notes issued are repayable in advance a, a prke corresponding 10 their nominal value plus accrued interest. 30 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,ZOOl Under certain conditions, France Telecom has the right to reimburse the bond following the following terms: 14. OTHER LONG-TEKV BORROWINGS The table below presents an analysis of France T&corn‘s other . delivery of France T&corn shares on the basis of the long-term borrowings by type, af,er rhe effects of currency exchange ratio, swaps: - and se,tlemen, of the posilive difference berween the redemplion price of the bond and 99% of the market value of the exchanged shares. Concurrent with the private placemen, of 69 million cmnm~n shares of STMicroelec,ronics in December 2001, France Telccom issued exchangeable notes fore 1.5 billion (see note 8). The notes. of nominal value f 1,000, bear imeres, a, a rate of I% per annum Starting January 2, 2004 until December 17, 2004, lhesc notes are redeemable for shares of STMicroelec,mnics a, a ratio of 19.6986 share for each note (representing an exchange 2) Includes a, December 31, 2000. e 10 billion relating to price per STMicroelectrmics share off .50.765), this ratio may the syndicated credi, line of July 31,2000, re,inancsd as be subject 10 adjwmen,. Staning January 21, 2004, without lang-term borrowings on March 14,2001. condition. France Telecom can exercise its option of anticipated repaymen,. The movement in notes is primarily due 10 the following: . On March 14, 2001, France Telecam issued international notes for the equivalent of e 17.6 billion. The note were issued ,O Under cenain conditions. France T&corn has the right to repay refinance existing borrowings and consist of 7 tranches, of which the bond following these ,emx 4 tranchss are in US16 for US6 9 billion, 2 in eums fore 7 billion, - delivery of STMicroelecrronics shares on the basis of the and one in GBP for GBP 600 million. The notes nature behveen exchange ratio. 2 and 30 years. - settlement of the pasidve difference between the redemption - At December 31, 2001, outstanding notes issued under the price of the bond and 99% of the market value of the exchanged EMTN programs amount to e 16,681 million, of which e 16,055 shares million is ciassiiied as long-term debt. 31 FRANCE TELECOM NOTES TO THE CONSOLlDATED FINANCIAL STATEMENTS Derember 31.2001 The table below presents the annual malurities of total long-term debt at December 31, 2001, excluding the short-term ponion, The sable below sets our notes by issuer (excluding convertible or exchangeable notes): The table below gives details of other outstanding notes issued by France Telecom SA at December 31, 2001, before consideration of the impact of interest or currency swap agmments: 32 FRAtiCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,ZOOl GBP 197 2008 8.63 324 316 “SS 2.500 2031 8.500” 2z.!2L--.L Loans maturing in ZOO, 6.692 uss 18 2008 8.00 21 19 Euro 94 2008 94 94 currency swpr I2331 (59) 1.63 GBP 150 2009 8.88 247 240 Total Other notes 36,985 17,083 ~ us 263 2009 9.00 298 282 Currency Swaps (44) (29) Tot*, 1,164 1,135 IS. OTHER SHORT-TERM BORROWINGS The table below presents an analysis of France T&corn’s other short-term borrowings by type, after the effects of currency swaps: At December 31. 2001, France Telecom SA n,,tes are repayable at due date. and na specific guarantees have been given in relation to their issue. The outstanding notes of France Telecom SA at December 31, 2001 have not been guaranteed. Certain notes may be repayable in advance, at the request of the issuer. FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Deeember 31.2001 - Tmnche A of tZ 5 billion, with one year maturity and one year term-out, thus a total of2 years following closing date. - Tranche B ofe IO billion, with 3 yearmaturily. When this syndicated credit line was obtained, France T&corn committed to maintain certain financial ratios using EBITDA. interest expense and net borrowings. 16. EXPOSURE TO MARKET RISKS In connection with its industrial and commercial activities. France Teleeom is exposed to various types of market risk related to the management of the cost of its debt and the value of certain foreign currency denominated assets (foreign investment securities). Based on an analysis of its overall risk exposure, primarily due to changes in imerest rates and exchange mtes, France Telecom uses a variety ofderivative financial instruments within limits set by management ai m their potential impact on the statement of income, with the objective being lo optimize the cost of financing. France T&corn disringuishes between three different types of use of derivative financial instrumenfs: France Teiscom aims to balance its long-term debt portfolio between fixed and variable rate instruments in Euros so as lo minimize tbs cost of linancing, and wes firm and optional interest rate instruments (swaps, future, caps and floors) within limits established by management. The fallowing table analyzes long-term debt by interest rate, including all exchangeable and convenible notes and other long- term debt, with the shon-term potion, taking into account the efkt of imerest rate and currency rate swap agreements: 34 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,2001 At December 31, 2001, a notional amount of e 594 million of swaps not qualifying as hedges for accounting purposes is available to France T.&corn. These swaps were accounted for using the method described in Note 2. France Telecom manages a treasury position as either lender or borrower depending on cash flows provided by operating cash flows and maturities of long-term debt. France T&corn periodically reviews its projected short-ten debt position and may use derivative interest rate instruments (future rate agreements, shon-term swaps, EURIBOR contracts and interest rate collar agreements) to cover this position against unfavorable changes in interest rates. At December 31, 2001, the derivadve interest rate i”strume”U I Foreign currency risk management The activities of France T&corn abroad are carried out by subsidiaries operating essentially in their own countries. 35 FRAh’CE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 3I,2001 Therefore, the exposure to foreign currency risk on these The following table gives, for the off balance sheet iostmmem commercial operations is limited. France Telecam primarily (currency swaps, foreign exchange forward contracts and hedges the risk related to the issuance of foreign currency notes eunency options) held by France Teleccm group. details on the and on certain assets in foreign currency notably cer!ain non- currencies to be delivered and to be received: strategic invesments. In order to take advantage of apponunities to reduce the cost of borrowings. debt instruments may in some cases be initially comracted in foreign currencies. They are generally convened into Euros immediately through the ox of currency rate swap agreements in order to reduce France T&corn’s exposure to foreign exchange risk. Lonp?m borrowings by currency, taking into account the effect of currency swap contmc1s. is as follows: received an The borrower position in foreign currency detailed above is due 10: (If - Positive values indicate the currencies to be received and - borrowings of the subsidiaries in the currency in which they negative values indicate the currencies to be delivered. operate: (2, - I” Euro equivalent. - France T&cam’s foreign currency debts used 10 finance the subsidiaries’ operations in this fame cunency, or hedging assets in this currency. Financial instruments that potentially subject France T&corn to At December 3 I, 2001, France T&corn SA hedged assell in concentrations of credit risk consist primarily of cash foreign currency through a borrower position and currency equivalents, negotiable bills, marketable securities, trade options ofan amoont equivalent to E 2,590 million. At December accounts receivable and financial instruments used in hedging 31, 2001, France T&corn was exposed to foreign currency risk acrwmes due to a non hedged foreign currency borrower position for an France T&cam does not consider itself exposed to a amount equivalent to f 3,159 million. concentration of credit risk with respect to trade accounts receivable due to its large and diverse costomer base (residential, 36 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31. ZOOI professional and large business customers) operating in numerous industries and located in many regions and countries. France T&corn places its cash equivalents and marketable 17. FAIR VALUE OF FINANCIAL INSTRUMENTS securities with a number of very highly rated financial The principal methods and assumptions used to estimate the fair institutions and industrial groups. France Telecom contracts value of each class of financial in~trumems are described below. interest rate and foreign exchange instruments with major high credit quality financial institutions. France Telecom does not For cash and cash equivalents, trade accounts receivable. bank believe that there is a significant risk of nonperformance by these overdrafts and other ahan-term borrowings and trade accounts counrerpanies because it continually monitors their credit ratings payable, France Telecom considers their carrying value 10 be the and limits the financial exposure to any one financial institution. most representalive estimate of market value, due to the shon- For each financial institution, the maximum loss in the event of term maturily ofthese instruments. nonperformance is determined based on the notional amounts of The market value of non-consolidated marketable securities and interest rate and foreign exchange contrac~( outstanding and unrestricted invesunems in quoted companies has been estimated coefficients. which take into account their nature and remaining based an quoted market prices at December 28, 2001. For other duration. investments, France Telecom considers, using available information, that their market value is not less than carjing value. Individual limits are established based on the counterpanies’ credit rating and net assets. Contracts with a duration of more than one year can in principle only be entered into with financial insthutiom having a credit rating of et least AA-/At73 from at Af December31. least NO credit rating agencies. (in millions of eumsl 7.001 2000 ,Voorio,~, unvxm,s o/dwivurive Jinoncial imrmnwnrs The comrac1 or notional amounts shown below do not represent an,oun!~ exchanged and thus are not a measure of the exposure of France Teiecom through its use of derivatives 37 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,2001 The market value of long-term debt was determined using: - the present value of future cash flaws, discounted using rates available to France T&cam at December 28, 2001 for inwument~ with similar terms and maturities; - the quoted market value for convertible, exchangeable and indexed notes The fair ~alucs af currency exchange and interest rate swap contracts were estimated by discounting the expected future cash flows using market exchange rates and related interest rates at December 28. 2001 wer the remaining terms of the co”lrac1s. The fair value of over-the-counter opdons was &mated using option pricing tools recognized by the market. 38 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,ZOOl 18.PEh‘SlON PLANS AND OTHER LONG-TERM LlABlLlTlES Pension plans and other long-tern liabilities are as follows: The actuarial cost of the early retirement plan described in Note 2. and the sensitivity of this cost to the success rate of the plan are as follows: FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,2001 actuarial assumptions have been reviewed on the basis of trends _ deferred income for a total amount of e 160 million relating to noted al the end of 2001. The discount rate of the plan for 2002 Orange plc. Deferred income relates to the net credits arising and the following years remains unchanged at 5%. and the from in-substance early extimguishment ( At December 31.2001 origin MM”dQ Equivslrnr in Amaunts The actuarial liability for post-retirement benefits of c 149 II ndoirJ”s cd *r*wn million at December 31, 2001 (C 140 million at December 31, rurren C”lCI I” moI,o”s Cl CY 2000) has been dewmined using a discount rate of 5%. eUrOI MC 2003 270 234 (1) Euro 2004 470 GOP 2004 IO Total 750 234 (I) Multicurrency in Euro equivalent As described in Note 3. the amount of e 2,077 million covers the nx.ximum payment risk ofthe CVR. 19. OTHER CURRENT LIABILITIES At December 3 I, 2000, other cnrrenf liabilities included: the debt r&ted to the acquisition in 2000 from As described in Note 8, the amount of ‘Z 81 I million covers the Deutschc Tclckom of its investment in Wind settled risk of loss on the call and put options contracted with financial in July, 2OOl(c 2.4 billion); institutions. the payable to E.On, related to the acquisition of Orange Communications SA (e 1.0 billion) settled through Orange SA shares in the six months ended June 30, 2001. Upon transfer of the shares in 2001, put and call options were entered into (See Note 28): the security issued in favor of Vodafonc following In 2001, the other long-term liabilities include: the purchase of France T&corn shares in August. 2000 in connection with the Orange plc acquisition - fixed asset supplier payables fore 209 million; (f 2.2 billion), settled in March 2001. 40 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 21. SHAREHOLDERS’ EQUITY Settlement of these liabilities during the year explains the At December 31, 2001, the share capital of France Telecom movements between 2000 and 2001 of the other current amount to C? 4,615,327.772 and comprises l,l53,831,943 liabilities. ordinary shares of par value e 4. For the year ended December 31, 2001, the weighted average number of ordinaly shares in circulation amounted to 1,!03.126,514 shares and the weighted average number of ordinary and dilutive shares amounted to 20. MINORITY INTERESTS 1,176.9%5,343 shares. The sFT law provides notably that the French State remains the majority shareholder. The State owns 55.5% of France Telecom’s share capital at December 3 I, 200 I, During 1999, France Telecom performed two capital increases, *s follows: . The conversion of the share capital into Euros, giving a nominal value of e 4 per share, through incorporation of rese~es fore 193 million; . 1,340 ordinary shares were issued es pan of the conversion right of convertible notes open since December 7. 1999, for c 107,200, including premium. In 2000. France Telecom : In 2001. the effect of acquisitions and divestitures relate mainly . increased iIs share capital through the issuance of to the public offering of approximately 13% of the capital of 129,201,742 new shares with par value of e 4, representing Orange, the EquanllGlobal One transactions and the dilutions in e 516.8 million, in connection with the acquisition of Wanadoo for the Freesewe and lndice Muldmedia acquisitions Orange plc from Mannesmann on August 22, 2000. The (see Note 3). as well as No~elff’elecom Argentina being premium attached to each share issued amounted toe 136.2, accounted for using the equity method. and totalede 17.597.3 million; . issued 14,300 ordinary shares as pan of the conversion right of convertible notes open since December 1, 1999 fore I.1 At December 31, 2001, minority interests relate to Orange SA million, including premium. and its subsidiary for an amount of f 4,204 million, to the EquanUGlobal One group for E 1.532 million and to Wanadoa fore 1,507 million. In 2001, there have been no operations on share capital. 41 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 million, net oftax (E 778 million) In 1998 and 2001, convenible notes were issued for a lotal amount of F 5.5 billion (See Note 13). The maximum number of shares to issue upon conversion or exchange is respectively 25.4 The purchase on March 25, 2002 of the remaining France million and 48.5 million. T&corn shares held by Vodafone (See Note 28) will reduce shareholders’ equity by f 4.9 billion. Additionally. if France Through the powers vested in it by the Annual Genera, Meeting Telecom or Deutsche Te,ekom exercise their cross options (See of June 2,. 2000. the Board of Directors of France T&corn has Note 281, it would have the effect, on the basis of quoted market the authority for 26 months from such dare to issue shares or value of France T&corn shares at December 28, 2001, of inslruments giving access to France T&corn share capital. The reducing shareholders’ equity by E 920 million. cumulative nominal amount of share increases including both newly issued sharer or shares issuable upon conversion or exercise of securities and the aggregate cumulative nominal amount of debt instruments may both not exceed f 900 million. No issues have been made in 2001 under this authority. At he Ordinary and Extraordinary General Meeting held on May 31, 2001. the company’s shareholders authorized the Board of Directors lo purchase France T&corn shares representing up to 10% of the capiwd. At December 31, 2001 France T&cam held 48.5 million al its own shares, for a gross amount of E 5,002 million. rrprescnting 4.2% of the share capital. At December 31, 2000. France Telecom held 15.4 million France Telecom shares (representing 1.3% of its share capital). Durin8 the year ended December 31. 2001. France Telecom purchased 64.6 million shares a, an average price of E 103.37. The ocquiritionr result mainly from two purchases in March 2001 concerning 64.1 million shares for an amount of +I 6.65 billion in accordance with the agreement signed on February 28, 200, between France Telecom and Vodafone (See Note 3,. Durinf the year ended December 31.2001, France T&corn sold 31.5 million shares at an avenge price off 56.71, including the contribution to the SITA foundation of 30.9 million shares for the acquisidon of Equant (See Note 3). The resdt of these sales is 42 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 The table below sets out main operating indicators pet segment for the last three years: 22. SEGMENT INFORMATION As a result of the reorganization in 2001 of its global services to businesses under Equant and of the reorganization in 2000 of its mobile telephony activities under Orange SA and its consumer Internet activity under Wanadoo, France T&corn has redefined its segments as follows: The segment “Orange” includes worldwide mobile telephony services, in France and the United Kingdom, as contributed to Orange S.A. in 2000, including Orange plc from its date of acquisition by France T&corn (i.e. for 4 months in 2000). The segment “Wanadoo” includes Internet Access, Portals. e-Merchant, Directories and Application Service Provider (ASP) activities contributed in 2000 to Wanadoo S.A. The segment “Fixed line, voice and data services in France” mainly includes the activities within France as an operator of fixed telephony, data transmission, broadcasting and cable television. The segment “Fixed line, voice and data services - International” includes the same activities outside France (notably Equant). France T&corn segments may evolve in the future, along witb France T&corn’s strategic choices. France Telecom evaluates the perfomnnce of its segments and allocates its resources based on EBITDA results, which represents the operating income before “specific non- recurring items” and “depreciation and amortization”. The “Elimination and other items” column includes inter-segment transaction eliminations and other nan- material reconciliation items to France Telecom financial statements. 43 FRAh’CE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 3,,2OOI The “Fi?ed line. voice and data services” segment outside of France includes Equant for the last six months of 2001. On a scope comparable to 2001 (pro font?), the sales, EBITDA and operating income before special items of the “Fixed line, voice and data sewicest’ segment outside of France for 2000 would have represented respectively C 6,988 million, e 1,235 million and E (12) million. Year ended Dccembrr 31. zoo, *ooo 1999 (in millions of .,,m.\ Sales 43,026 33,674 27,233 France 27,626 24,986 23,753 Other 15.400 8.688 3.480 Fired assets”’ 49,911 50,912 29,889 France”’ 20,431 22.171 22,882 Other 29.486 28.741 7,007 “I tangible and intangible, excluding goodwill. ‘:’ includes all shared network S~,UCIURE, notably the European backbone. 23. PERSONNEL COSTS Year ended December 31 (in millions afeuror, except ZOO, 2000 1999 number of employees) Average headcount (full time 206.184 188.866 174,262 equivalents”’ Personnel costs (1’ 6,889 5,993 5,177 . Wages and salaries 2,593 2,406 i.212 . Social chaiges TOtal 9,482 8,399 7,389 44 FRANCE TELECOM NOTES TO THE COWOLIDATED FINANCIAL STATEMENTS December 31.2001 Year ended December 3, 2001 2000 1999 (in millions of euros) Gain or loss on divestment *I1 2.576 5,544 603 24. SPECIAL ITEMS Year ende December31 Dividends received 262 255 IS0 2001 2000 1999 Dilution result lo’ 1,993 2,096 - (in millions of euros) Other provision movements “1 (694) (3,931) - Cost of sale of receivables I” (503) _ - French early retirement plan I” (210) (225) (238) Other WS) (7) (16) Total 3.476 3,957 767 25. OTHER NON-OPERATIXC INCOME (EXPENSE), NET In 2001. the odw non-operating income (expense) relates mainly 10: . non-operating expenses for a tota, alnoun, off 9,380 million (f 7.882 million, net of tax) of which (i) E 5,910 million (f 4,581 million net of tax) relate to the valualion alloiunce an NTL’s c~rnm~n and preferred stocks as described in Note 8, (ii) e 2,077 million (f 2,077 million, net of tax) relate to the provision for Iosscs and charges on the Equant CVR (see Note 3 and Note 17) and (iii) f 1,393 million (f 1,224 million, net oftax) relate to MobilCorn (see Nate 7); . as well as other non-operating income (expense) set out below: 26 *INCOME TAXES France T&corn files a consolidated tax return for all French subsidiaries owned in excess of .9S%. Following the Orange public offering, Orange SA and its French subsidiaries are no longer in 2001 within the FRANCE TELECOM NOTES TO THE CONSOLIDATED FINAh‘CIAL !XATEMENTS De&ember 3*,2001 scope of the France T&corn consolidated tax regime but have their own tax regime sraning in 2002. Nan transferable tax loss carry-forwards gave rise to the recognition of a credit of e 1,453 million in the statement of income related to creation of a deferred tax asset, with e 778 Following the Wanadoo public offering in July 2000, million recorded directly against consolidated reserves for the Wanadoo SA and its French subsidiaries have their pan resuldng from the tax effect of the sale of France T&corn own consolidated tax regime from 2001 onwards. shares (see Note 21). Income before income taxes, minority interests and France T&cam considers that, on the basis of budgets and goodwill amortization of the companies and equity in strategic plans of France Telecom SA and of the companies net resuk of affiliates is as follows: within the scope of its consolidated tax regime, (i) no current income tax will be due before 2009 by France Telecom SA’s Year ended December 31, consolidated tax regime, (ii) the recognized deferred income tax asset resulting from France Telecom SA’s loss carry-fomards (in millions ofeuros) 2001 2000 ,999 will be recovered through taxable profits expected for future French companies (2.938) 7,423 4,885 fiscal yean in its activities as fixed line operator in France, Farcipn companies (2.310, (1.135, (641, activities historically profitable. Moreover, due to these results TOtal (5.248) 6.288 4.244 and to the tax method of reputed deferred amortization (onmissenm,s ripulds dn@rPs):rhe pa” of the loss can-y- lneonw tax for the year is the result of the application of the forwards that canno be carried forward indefinitely under French forecas, year-end effective tax rate on the result before tax at tax law, should be entirely used within the 5-year legal limit. The December 31. 2001. Deferred taxes are based on determined tax remainder of the toss can be indefinitely carried forward. On this rates, i.e. 36.43% for 2001 and 35.43% for 2002. basis net deferred tax assets are esdmated at e 3.6 billion at the In 2001. France T&corn SA and companies within the scope of end of 2006. its consolidated tax regime recorded a significant tax loss. which is mainly due to the Orange capital public offering and 10 the sale of France Telecom shares to SITA as pan of the purchase of Equant. A carp back off 1.630 million and a loss carry-forward ofE 2.23 I million resulted from this tax loss. In December 2001. France Telecom sold the following Oovemment receivables to a financial institution: . a receivable of E 235 million resulting from the option of carrying back the tax loss related to fiscal year 2000. . A receivable of an estimated amount of e 1,471 million resulting from the option of carrying back the tax loss related to fiscal year 2001. As compensation, France Telecom received notes worth f I,1 1 I million. 46 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 income taxes can be analyzed as follows: recognized in the context of the contribution of Global One to Equant. Deferred taxes assets/(liabilities) by nature of temporay difference before compensation by lax entity are analyzed as follows: At December 31, The reconciliation between the French statutory tax rafe and the effective rate of income tax credit/ expense is as follows: ,in milliom ofeuros, 2001 2000 Legal tax mc X.4,% 37.76% on nlillicm ofemr, .?001 2000 TkmliCd tax 1,912 (2.374, Net long.tern deferred tax assets 5.369 2.532 . Permanent differencer 2.846 1.433 Net shon-term defemd ax as~cts 1.102 I.609 . Losses from subsidiaries Net long-ten deferred tax liabilities (330) (8301 "01 included in Ihe French eonrolidaled tax regime (1.826) (1,154) Net Sh.3”.term deferred tax liabilities ,374, (512, . Effect ofreduced tax me 782 TO,ll 5.761 1.199 Effective tax 2,932 (1.313) A f 750 million discounting effect has been recorded against deferred tax ~sscts of the France Telecom SA’s consolida{cd ax Permanent differences for fiscal year 2001 are mainly impacted regime based on the anticipated timing of reversal. by (i) de difference between book value and tax value of the Orange SA shares sold in the [PO, (ii) the dilution gains related Allowances against deferred tax assets relate principally lo IO Wanadoo and Wind, as well as (iii) tbe effect of the gain lax loss cany forwards in new subsidiaries or subsidiaries 47 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31.2001 operating in emerging markets for an amount of C 2,923 million (c I.859 million a, December 31, 2000). A part of these tax loss carry forwards will be recognized when the activity of the subsidiaries becomes durably profitable. 27. RELATED PARTY TRANSACTIONS Telecommunicationr sewices to French goYemmental authorities, which are one of France Telecom’s largest customers, as well as those 10 its various regional and local authorities are provided 8, market prices. Subsequent 10 the separation of France T&corn and pos,al services (La Pate) in 1987 a number of transactions have subsisted relating particularly to personnel and shared properties. 48 FRANCE TELECOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,ZOOl 28. COMMITMENTS AND CONTINGENCIES Off balance sheer commitments related lo purchases of network equipment and terminals In the ordinary course of ifs activities, France Telecom enters into purchase contracts with network equipment manufacturers and into supply contracts with suppliers of terminals and other equipment. Management believes that there is no significant risk of financial 105s from these contracts. Off balance sheet commitments related to network consfrucdon and operation In connection $4, the award of licenses, concession contrac1s or acquisirion of businesses. France Telecom is committed to cenain obligations imposed by administrative or regulatory audtorities relating to network coverage, quality of service and tariffs. In some instances. France T&corn is required to provide comfort letters 10 financial institutions relating to bank guarantees given to relevant authorities. Management believes dnt France Telecom has the ability to meet these obligations to On October 31, 2001, France Telecom signed a promise to se11 administrative or regulatory authorities. 42 technical strategic buildings which will be released as pan of a capital lease contract. The sale and the capital lease related to Off balance sheet commitments related to leases these buildings are planned by June 30,2002. France T&corn leases land. buildings, equipment, vehicles and other items under lease agreements expiring at various dates As pan of cross-operation leases (QTE lease) with disdnct third during the next 10 years. parries, France T&corn gave and took for hire certain Moreover. as pan of the divestment of pan of its buildings (Note telecommunications equipment. The crossed rental flow and 6). France T&corn is committed to rc-lease these buildings France Telecom remunemlion were prepaid at the outset of the except far certain assets 10 be vacated in the short-term. ~ontmts and, for this reason, are not shown in the above table. Management expects that leases that expire may or may not be Of this remuneration. the portion which pays for the guarantee renewed or replaced by other leases in the normal course of against third Qany commitments given by France Telccom is business. taken as income over the period of this guarantee. France T&corn estimates that the risk of the guarantee, which amounts Rental expense under operating leases in the year ended to e 750 million at December 31, 2001, being drawn upan is December 31, 2001 amounts to e 831 million ( f 473 million in negligible. 2000 and f 313 million in 1999). The table below shows future minimum lease payments due under non-cancelable capital and operating leases at December 31. 2001, including those contracted within the context of the divestment of Dart of the real estate: 49